Estate Planning Tips
By: Dennis R. "Rep" DeLoach, III
When preparing for your death or incapacity, please be aware of the following general rules:
Make sure you identify all of your assets: One aspect of estate planning is making sure your assets are distributed as you intend upon your death. While our office may have prepared your Last Will and Testament or living trust and other accompanying documents, the reality is that the planning you do with an attorney does not end with your documents. You must also understand how all of your assets will be distributed upon your death. You need to know the beneficiaries of your life insurance policies, IRAs, 401ks and annuities, which you are in control of. Your Last Will and Testament controls only those assets in your own, individual name and your living trust only controls assets in the trust. To assist yourself and your family, keep a running list of all of your assets and the beneficiaries for each.
Make sure your safe deposit box has a co-signer: If you die with no one else with access to your bank deposit box, your heirs will have to go to court to gain access. Over the years, we have gone to the extent of securing a court order to access a deceased owner's safe deposit box only to discover that they contain few, if any, assets of any value resulting in needless time and expense. If you want to maintain a safe deposit box, always consider granting permission for someone else to access it should you pass unexpectedly and make sure they know where the key is kept. One option, if you have a living trust, is to re-title your safe deposit box into your trust. When you die, the box ownership stays in the name of the trust.
Update your power of attorney periodically: We generally advise our clients to update their power of attorney every five (5) to ten (10) years. There are two reasons for this. First, banks and other financial institutions are reluctant to honor older powers of attorney, which can cause unpredictable problems. Secondly, powers of attorney laws and formats can change, and get better, over time. The powers of attorney that we draft now are, frankly, better than the ones we did five (5) years ago due to changes in the law and our legal experience.
Know where your original documents are: We frequently receive calls from our clients concerning lost documents (wills, powers of attorney, living wills, etc.) and asking for new copies of their signed documents. We also open a number of probate estates due to the decedent's lost Last Wills and Testaments. Although this should go without saying, please designate a safe location for your estate planning documents and be sure to tell someone where you put them. Review your estate plan periodically: You should periodically review your estate plan and ask yourself the following questions:
- Does my current Last Will and Testament accurately reflect my wishes?
- Do I know where all of my original estate planning documents are?
- Are my assets titled to my trust? (when applicable)
- How old is my durable power of attorney?
- Who are the beneficiaries of my life insurance policies, IRAs or annuities?
In summation, an ounce of prevention is better than a pound of cure in estate planning. Please schedule an appointment if you have any estate planning or elder care matters for which you have concerns.
Excluding Taxable Income Generated from a Short Sale
By: Dennis R. DeLoach, Jr.
According to the U.S. Tax Court, a "short sale" of real estate generates taxable income to the extent of the excused unpaid mortgage. As a result, a taxpayer must include income from the discharge of indebtedness on his/her Federal Income Tax Return. The reporting process following a short sale begins after an applicable entity discharges the indebtedness of any person, in an amount of $600 or greater, during a calendar year. Once such indebtedness is discharged, the lender must file a 1099-C Form with the IRS and issue a copy to the borrower. Taxpayers must then report all form 1099-C income on their returns, unless they qualify under an exception and file the required IRC 982 Form.
One exception to the general rule requiring a taxpayer to include income from the discharge of indebtedness on his Federal Income Tax Return allows a taxpayer to exclude taxable income generated from a short sale if the indebtedness discharged is qualified principal residence indebtedness discharged before January 1, 2014. Accordingly, to qualify for this exception the following conditions must be met: (1) the property sold in the short sale is the taxpayer's principal residence, as used in IRC §121; (2) the cancellation of debt is Qualified Principle Residence Indebtedness under IRC §163(h)(3)(B); and (3) the debt is forgiven on or after January 1, 2007, and before January 1, 2014.
All facts and circumstances should be applied to determine whether a residence is a taxpayer's "principal residence." If a taxpayer alternates between 2 properties, using each as a residence for successive periods of time, the property that the taxpayer uses a majority of the time during the year ordinarily will be considered the taxpayer's principal residence. Further, the term "qualified residence interest" means any interest which is paid or accrued during the taxable year on (i) acquisition indebtedness with respect to any qualified residence of the taxpayer, or (ii) home equity indebtedness with respect to any qualified residence of the taxpayer.
The term "acquisition indebtedness" means any indebtedness which is 1) incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer, and (2) secured by such residence. The aggregate amount treated as acquisition indebtedness for any period shall not exceed $1,000,000 ($500,000 in the case of a married individual filing a separate return). It is important to note that acquisition indebtedness does not include home equity loans used to pay off credit cards, purchase a car, or pay medical bills etc.
The term "home equity indebtedness" means any indebtedness (other than acquisition indebtedness) secured by a qualified residence to the extent the aggregate amount of such indebtedness does not exceed the fair market value of such qualified residence, reduced by the amount of acquisition indebtedness with respect to such residence. The aggregate amount treated as home equity indebtedness for any period shall not exceed $100,000 ($50,000 in the case of a married individual filing a separate return).
Also, note that special rules apply to Pre-1987 indebtedness.
For the above exemption to continue, Congress has to extend the exemption provision prior to its expiration. Otherwise, starting Jan. 1, 2014 a taxpayer must include income from the discharge of indebtedness on his/her Federal Income Tax Return.
The law firm of DeLoach + Hofstra, P.A., does not specialize in tax law and any individual seeking to employ the above exceptions should seek independent counsel and advice pertaining to tax ramifications.